Monetary Policy Isn’t Class Warfare

The latest to make the argument is Pascal-Emmanuel Gobry, writing at The Week. Others argue further that central banks throughout the developed world have been held back from generating the required inflation because it would hurt the rich.

This sort of class-based analysis of monetary policy isn’t confined only to supporters of looser money. The mirror-image argument comes from the hard-money crowd: Low interest rates have helped rich stockholders while punishing poor savers and those on fixed incomes.

All these views seem mistaken to me, a result of looking at monetary policy the wrong way. Almost all of us share an interest in avoiding and escaping economic slumps; it’s just that we disagree about how to do so.

I share Gobry’s view that monetary policy has been too tight in recent years (especially in Europe). But in general a higher inflation rate won’t help the poor and hurt the rich — or, at least, it won’t have any major long-run effect on the distribution of income. If there’s a temporary and unanticipated increase in the inflation rate, it might redistribute some wealth, but only for a short time. If the Federal Reserve permanently raised its inflation target — from 2 percent a year to, say, 4 percent — it would be baked into nominal wages and nominal interest rates, leaving everyone more or less where they were.

Thinking about the past few years, though, it seems to me that a focus on distributional effects misses what’s important. The Fed’s monetary policy was much too tight in 2008 and helped cause a sharp economic downturn. Its tightness since then has impeded the recovery. But wouldn’t rich people have been better off if the Fed hadn’t caused that downturn, and hadn’t impeded the recovery?

The conventional view of the Fed’s effect on savers seems short-sighted as well: If it had followed a looser policy throughout these years, real interest rates would probably be higher than they are now, and savers would be doing better. But was 2008-2009, the recent period when monetary policy was at its tightest, a good time for savers? Was the early 1930s? If Milton Friedman was right that low interest rates can be a sign of excessive tightness — and he was — then we should consider the possibility that tightness doesn’t always serve the interests of savers.

So why are most conservatives so resistant to looser money? I don’t think we need to resort to arguments about their class interests or to convoluted psychological theories. Nobody likes the idea of paying higher prices, and so higher inflation is a hard sell. Conservatives formed a lot of their economic ideas in the 1970s, when inflation was high, and they remember how painful it was to get it back under control in the early 1980s.

We’re in a different era now. It’s not just that inflation is lower. We also now have market signals of future inflation that we lacked then — and they suggest inflation will be low for some time to come. And we’re dealing with the consequences of the first drop in nominal spending in decades. Most of the time, the conservative instinct to resist looser money is right. As a result, unfortunately, it persists even in the special circumstances when it isn’t.